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Taking counsel

  • 2005-12-21
  • Janis Neimanis, Marius Matonis, Kristi Kullerkup [ LOZE, GRUNTE & CERS ]
Board member activity in the Baltic states

Legal relationships between management board members and the company where they work differ not only by company, but also by country. If the experiences of the Baltic states are compared, in Estonia the relationships between management board members and their employer are the most regulated, while in Latvia and Lithuania there is still ambiguity.

The Estonian Supreme Court has ruled that when a person gives his consent to become a member of a management board, his employment contract ends on the basis of the parties' agreement. Members of management boards may not be employees of the company in their capacity as managers. But they may be employed by the company in another capacity that is clearly distinct from their duties as a director 's i.e. outside its membership functions.

In Lithuania and Latvia, the laws do not prohibit members of governing or supervisory bodies to be employed in the company for work that is outside their membership functions. In such a case, the relevant employment contracts are concluded, while no agreements are concluded with the members of governing and supervisory bodies of stock companies. An employment contract, which is regulated by the labor law, must be concluded with the head of the company.

The Estonian Employment Contracts Act is not applicable to legal relationships between a company and members of its managing bodies. Such relationships are regulated by the Commercial Code. The Jan. 1, 2006 amendments to the Commercial Code stipulate inter alia in more detail the issues related to remuneration of members of managing bodies and also the possibility for members of boards to resign is clarified.

In order to secure the rights of members of managing bodies, the most important issue is to guarantee the right to compensation or damages in case of dismissal as the appointment can be revoked at any time. So in Estonia it would be strongly advisable to conclude a service agreement. Such an agreement is not an employment contract in the meaning of the Employment Contracts Act. The Law of Obligations Act applies to the service agreements.

The work and remuneration of management boards of stock companies in Lithuania are regulated by the Law on Stock Companies and Civil Code, which, however, fail to state explicitly if, and what type of, contract should be concluded with the member of the management board. Notwithstanding, the law states that remuneration for board members' activities may be paid only in the form of annual bonuses (tantiems) out of the company's distributable net profit, by a relevant decision of the shareholders' general meeting. The amount allocated for such bonuses, together with the portion of the profit allocated for employee bonuses and other purposes (e.g. charitable purposes, support, etc.), may not exceed one-fifth of the net profit of the reported year.

This leads one to conclude that relationships between management board members and the company are not subject to the employment legislation and their rights, obligations and remuneration is established by the relevant provisions of the Law on Stock Companies and Civil Code. Accordingly, members of the board do not enjoy any protection offered by the employment law (like regular salary, compensations in case of revocation, paid holidays, etc.). The general meeting of shareholders (or the supervisory council, if such is formed) may revoke the members of the board at any time without any prior notification requirements.

Janis Neimanis is attorney at law at Loze, Grunte & Cers, Marius Matonis is an attorney at law at Sutkiene, Pilkauskas & Partners and Kristi Kullerkup is attorney

at law at Tark&Co